Country asymmetries, endogenous product choice and the timing of trade liberalization

Abstract

We analyze the e!ects of trade liberalization on "rms' decisions and pro"ts in a vertical product di!erentiation model with countries which have di!erent characteristics. Firms decide product speci"cations at the beginning of the game, in which autarky is followed by trade liberalization (whose date is anticipated). Our analysis suggests that a "rm located in a large (or rich) country is the likely market leader at the trade equilibrium. This outcome might be reversed if small country "rms have a strong cost advantage, transport costs are negligible, or if the large country opens its market before the small one.